“I worked my entire career trying to remove regulations, and that’s one of the major things I did. …I’m a free market nut, and I believe in the market.”

(Former House Republican Leader Tom DeLay, October 1, 2008)

For years, Democrats have warned that Conservative Republicans’ hostility toward regulation and oversight would seriously harm the economy. During the last several years, and most clearly in the last few weeks, our worst fears have been realized. After nearly a decade of Republican-controlled government in Washington, Americans have seen their dreams of economic security and homeownership gambled away by deregulation, incompetent fiscal policies, misplaced governmental priorities, lack of Congressional oversight, and un-checked greed on Wall Street and in the financial markets.

As Senate Democrats help our nation recover from the Bush-McCain “perfect storm” of economic and regulatory failures, we call upon our Republican colleagues to acknowledge the harm that Bush-McCain economic philosophies have caused and work with us to stabilize the economy and restore the American Dream for middle-class families. It is clearer than ever that the American people need more Senators who are committed to change.

A Shameful Legacy of Regulatory Failures with Devastating Consequences for American Homeowners and Taxpayers

The Bush Administration failed to regulate the mortgage market, which has led to a global financial crisis and threatened the economic security of American families. Years of abuse by the mortgage lending industry and deregulation by Republicans have resulted in a crash of the subprime mortgage market and led to the worst American financial disaster since the Great Depression. Home lenders are filing thousands of new foreclosures each day;[1]over the next two years, more than two million Americans may lose their homes (see below for state by state figures)[2] and nearly 45 million of their neighbors will see their property values decline as houses foreclose around them.[3] As a result, towns and cities across America are experiencing business closings, increased crime, and an eroded tax base due to home abandonments, and Americans are losing their jobs, retirement, and health care due to a slowing economy. Moreover, the credit crisis that has followed is making it difficult, if not impossible, for many Americans to access loans of any kind — home loans, car loans, student loans, or even credit cards, which have traditionally helped families through tough economic times. And Wall Street firms, while pressed for more and more deregulation, are now standing on the brink of a total collapse, which is having a very negative impact on the broader economy.

Due to their own fiscal incompetence and mismanagement, in recent months and days, the Bush Administration has spent billions of taxpayer dollars rescuing Fannie Mae, Freddie Mac and several of Wall Streets biggest firms in an effort to keep the economy afloat. And most recently, the Administration has asked the Democratic-led Congress to authorize the spending of $700 billion to buy back bad mortgages from Wall Street and keep the nation from sliding into a deeper economic depression. Congressional Democrats agree that something needs to be done and have worked with the White House and Congressional Republicans to come up with a solution that stabilizes the economy, protects taxpayers, punishes wrongdoers, and prevents additional unnecessary foreclosures. Nevertheless, even as we move forward, we must remember the origins of this mortgage and economic crisis.

The home mortgage market gone wild. At the peak of the nation’s housing boom, subprime mortgages helped millions of Americans, most with limited or blemished credit, achieve the American dream of homeownership. These loans also helped millions more homeowners, many of whom were older Americans with good credit, but on fixed incomes, refinance their homes. Unfortunately, while some lenders and brokers offered these mortgages responsibly, many others engaged in predatory or irresponsible lending practices, using aggressive and manipulative tactics to steer vulnerable borrowers into “exploding” adjustable-rate mortgages (ARMs) they could never afford, trapping them in high-cost loans with costly pre-payment penalties. Abuse by the lending industry was especially acute in communities of color, where borrowers were offered adjustable-rate subprime loans even though they could have qualified for more stable fixed-rate and/or prime loans.

Due to higher interest rates, subprime loans were expected to, and for a time did, yield higher returns; lenders had no difficulty generating interest from Wall Street investors. Although investigations are ongoing into their motivations, credit rating agencies — usually known for their conservative estimates — began giving these subprime mortgage-backed securities AAA ratings, which spurred investment. Overwhelming Wall Street interest (or greed) created a perverse incentive structure in which lenders were paid more for selling risky, and then riskier, loan products to as many unsophisticated borrowers as possible.[4] To meet the demand, lending standards plummeted with some loans requiring “no money down,” “no proof of employment,” or “no documentation of income.”[5] As a result, between 2003 and 2006, the use of adjustable-rate subprime loans increased by 250 percent, from eight percent of all mortgage originations to 28 percent, with more than 90 percent of these loans having exploding ARMs and more than 70 percent having pre-payment penalties.[6]

And while this was happening, few, if any, in the Bush Administration, the Republican Congress, the regulatory industry, or on Wall Street seriously considered what would happened if these mortgages failed. Fewer still cared about what would happen to American families if they were unable to meet mortgage payments on their primary residences. And no one seemed to understand the full ramification of mass subprime loan defaults and home foreclosures on the entire American economy.

It turns out what the Bush Administration did not know, hurt America. As early as 2003, reports of Chicago foreclosure rates signaled that neighborhoods with high numbers of subprime loans were also experiencing high rates of foreclosure.[7] It was clear that these homeowners did not have sufficient resources to pay their mortgages in the first place.[8] As the housing boom turned to bust in 2005 the problem became more widespread and began to accelerate. Homeowners who banked on being able to refinance their ARMs loan at a lower, more affordable fixed-rate before it adjusted higher were unable to do so. Nearly 70 percent of subprime ARMs have adjustments from seven percent to 12 percent, and typical monthly payment increases of 30 to 50 percent in the third year.[9] As home values dropped, many homeowners found they were unable to sell. Stagnant wages, increased living costs, and rising interest rates made it difficult for even most homeowners to stay afloat financially. People simply could not make their mortgage payments, and more and more, homeowners were being pushed toward foreclosure.

Bush-McCain Republicans were asleep at the wheel. While this storm brewed in the mortgage markets, the Bush Administration failed to regulate lending practices and speculation by Wall Street investors, failed to see the warning signs of an unstable mortgage market, and, in some cases, actually encouraged lenders to offer, and borrowers to accept, risky ARMs over traditional, fixed-rate mortgages. Bush Republicans also continued to advocate for further deregulation.